(Adds detail on results and investigation, analyst comment)
By Noel Randewich
SAN FRANCISCO, April 23 (Reuters) - Qualcomm Inc on Wednesday posted its smallest quarterly revenue increase since 2010 as it wrestles with a smartphone market that is losing steam and shifting to China, sending its shares lower.
With expansion in the smartphone industry moving away from wealthy markets such as the United States and toward China and other developing countries, where consumers favor less expensive devices, Qualcomm’s once-impressive revenue growth is tapering off and it is focusing on costs to preserve its profitability.
The chipmaker reported fiscal second-quarter revenue of $6.37 billion, up 4 percent from the year-ago period. Analysts on average had expected $6.479 billion, according to Thomson Reuters I/B/E/S.
That was the smallest year-over-year percentage increase since the June quarter of 2010 when revenue shrank by 2 percent. It was far lower than the quarterly growth rates of over 20 percent that Qualcomm investors until recently have been accustomed to.
Less growth than expected in recent months in China, where China Mobile is preparing to launch a new, faster network with 4G, or LTE, technology, hurt Qualcomm’s results in the quarter, Chief Executive Steve Mollenkopf told Reuters.
“We think that what’s happening there is that is in anticipation of the launch of LTE,” Mollenkopf said.
He said he expects improvements later in fiscal 2014 as China Mobile, the world’s largest cellphone carrier, rolls out its new 4G network.
“The hope is the China lift will drive their recovery,” said Bernstein analyst Stacy Rasgon. “But anytime you have semiconductor companies looking for a back-half recovery it makes people nervous.”
Also on Wednesday, Qualcomm said it received a notice from the SEC advising the company of a preliminary determination recommending enforcement action in connection with a previously disclosed China-related bribery investigation.
The company denied wrongdoing and said it was cooperating with the investigation.
Qualcomm is also being investigated by China’s anti-monopoly regulator, which says it suspects the U.S. company of overcharging and abusing its market position, allegations which could lead to fines of more than $1 billion.
China and other developing countries are a major opportunity for the San Diego company as consumers upgrade from feature phones to smartphones and as China Mobile rolls out its 4G network with technology that Qualcomm dominates.
But China also presents challenges for Qualcomm as its competes with local rivals like MediaTek to sell chips used in smartphones made by Chinese manufacturers like Huawei and Xiaomi, which sell for much less than phones popular in the United States.
While the majority of Qualcomm’s revenue comes from selling so-called baseband chips that enable phones to communicate with carrier networks, most of its profit comes from licensing patents for its widespread CDMA cellphone technology.
Average prices for cellphones in the December quarter, used to calculate licensing revenue for Qualcomm in the March quarter, were between $221 and $227, the company said. That was more than the $219 to $225 range that Qualcomm estimated for the September quarter in its previous earnings statement.
Founded in 1985, Qualcomm has become the top chip supplier for smartphones, and its stock value has surpassed that of Intel Corp. Intel is still the world’s largest chipmaker by revenue but it has struggled to move beyond personal computers and gain a foothold in mobile.
Global smartphone shipments are likely to grow 19 percent this year, far less than the 39 percent increase in 2013, according to IDC.
Qualcomm had second-quarter net income of $1.96 billion, up 5 percent. GAAP diluted earnings per share were $1.14. Its non-GAAP earnings per share were $1.31, above its previous forecast of between $1.15 and $1.25. Analysts on average expected $1.22.
Qualcomm said it now expects full-year non-GAAP earnings per share between $5.05 and $5.25. It had previously forecast 2014 EPS between $5.00 and $5.20.
It said revenue in the fiscal third quarter, which ends in June, would be between $6.2 billion and $6.8 billion. Analysts on average expected third-quarter revenue of $6.592 billion.
Qualcomm shares were down 4.98 percent in extended trading after closing up 0.12 percent at $80.71 on Nasdaq. (Editing by Steve Orlofsky and Jonathan Oatis)